R&D Tax Credits Explained-Part III

This is the third in a series of guest posts by Daniel Tenner of GrantTree. The first article is here.

How to file R&D Tax Credits

Finally in Part III, here’s how to go about filing tax credits.

This is information that R&D tax credit specialists (like myself!) normally don’t want you to know, because they’re worried you might not need them, but I believe that this is a misplaced fear. The reason to use a specialist is to save time, maximise the claim size (we recently improved one client’s claim by a whopping 118%), and ensure things are done “properly”. Basic knowledge of the process should not be a secret, and in-depth, specialist knowledge is available to anyone willing to read the hundreds of pages of HMRC documentation, talk to HMRC, and start filing.

The process is simple. There are two things you need to communicate with HMRC, and one standard form that needs to be submitted (or amended if it’s been submitted already).

The first thing you have to communicate is why the work qualifies. This goes back to our previous article covering how to tell if a project qualifies for R&D Tax Credits. In essence, you need to write what’s called a “Technical Narrative” that explains, in HMRC’s terms and in clear English understandable to a layman, why the work is innovative, complicated, pushing boundaries, and so on. There’s an art in writing these technical narratives, and it’s beyond the scope of this article to go into that in depth, but in essence you need to make the case that the technology passes HMRC’s criteria.

The second part of the filing is the calculations. There, you need to justify the “headline figure” (the “qualifying expenditure”) so that HMRC can check your calculations and make sure you haven’t made any mistakes. Most claims will list people involved in the R&D, along with the portion of their costs that is estimated to qualify under the scheme. They will also list any subcontractors involved in the project, apportioned appropriately, and decreased to 65%, as per HMRC’s rules. Finally, most claims, even software claims, include some so-called “R&D Consumables” - things like software licences which were “consumed” in the R&D process.

Both of those together need to make a reasonable and coherent case for the claim, so that a non-specialist (most HMRC inspectors are not also technical experts!) can understand why the work is innovative and qualifies and adds up to this cost figure.

Finally, the form that is impacted by this is called a CT600 form. It is a form that states the Corporation Tax liabilities of the company. How to amend the form to include an R&D tax credit is beyond the scope of this article (most accountants will know how to do it, though in some rare cases we’ve seen mistakes), but in short, the headline figure needs to be included there and the tax calculations adjusted to reflect the tax credit.

On the highest level, that’s all there is to filing tax credits. Of course, in practice there are hundreds of little niggles that can catch you out, and both the calculation process and the definition of “qualifying R&D” subtly shifts through the years. I believe that it’s best to go with a specialist who can make sure that you always get the maximum return from the scheme, but if you want to do it by yourself, the information above should provide the starting point you need.

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